Save for retirement and receive some tax benefits in the process even if your employer doesn’t offer a retirement plan. There are two main types of IRA – traditional IRAs and Roth IRAs. Each has its own set of rules and offers different tax benefits. Metuchen Savings Bank offers both traditional and Roth IRAs.
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Who qualifies to make IRA Contributions?
Traditional IRAs are open to anyone up to the age of 70 1/2. Money in a traditional IRA grows tax-deferred. In other words, you won’t have to pay taxes on any earnings until you take the money out. That allows your money to grow faster than it would if you had to pay income tax each year on those earnings.
If you are not eligible for an employer sponsored retirement plan, you can make tax-deductible contributions to a traditional IRA. You can also do so if your income falls below certain levels, regardless of your retirement plan status.
For tax year 2017, couples filing a joint tax return who report adjusted gross income of up to $99,000, or singles with income up to $62,000, are eligible to make fully deductible contributions to a traditional IRA. In addition, taxpayers with incomes slightly above those limits: more than $99,000 but less than $119,000 for couples and more than $62,000 but less than $72,000 for singles – can make partially deductible contributions.
For tax year 2018, couples filing a joint tax return who report adjusted gross income of up to $101,000, or singles with income up to $63,000, are eligible to make fully deductible contributions to a traditional IRA. In addition, taxpayers with incomes slightly above those limits: more than $101,000 but less than $121,000 for couples and more than $63,000 but less than $73,000 for singles – can make partially deductible contributions.
When you put money in a traditional IRA, you can’t take it out before you reach age 59 ½ without paying a penalty, although there are exceptions. Some people consider this a disadvantage of traditional IRAs, but it can help keep your retirement savings on track.
Once you start taking money out of a traditional IRA in retirement, you will have to pay ordinary income tax on any earnings and on your tax-deductible contributions, but no federal taxes on withdrawals of non-deductible contributions. Depending on where you live, you may have to pay state taxes on those withdrawals.
The benefits of Roth IRAs are almost exactly opposite those of traditional IRAs.
You can’t make tax-deductible contributions to a Roth IRA. On the other hand, the money you put in a Roth IRA grows not just tax-deferred, but tax-free. In other words, you won’t have to pay any federal taxes, or state taxes in most states, on your earnings when you take money out, provided you meet certain requirements. You are also less likely to have to pay a tax penalty if you withdraw money early from a Roth IRA.
There are no age limits for contributions to a Roth IRA, so long as you have earned income. On the other hand, there are income limits. However, those limits are quite high. Singles who report adjusted gross incomes of less than $118,000 in 2017 and couples with incomes less than $186,000 qualify for a full contribution. Taxpayers with slightly higher incomes – greater than or equal to $118,000 but less than $133,000 for singles and greater than or equal to $186,000 but less than $196,000 for couples filing jointly – can make partial contributions.